In re Answers Corp. S’holders Litig., C.A. No. 6170-VCN (Del. Ch. April 11, 2011)
The shareholder plaintiffs in this matter sought a preliminary injunction to delay the proposed buyout of Answers Corporation. The shareholders wanted more time to consider the buyout offer and an alternative offer from another buyer.
The Court of Chancery set forth the elements required to obtain a preliminary injunction, which were not satisfied in this case:
First, a reasonable probability that they will be successful on the merits of their claims at trial; second, that they will suffer imminent, irreparable harm if an injunction is denied; and third, that the harm, if their application is denied, will outweigh the harm to the Defendants and the class if an injunction is granted.
The shareholders argued that the Board failed to maximize shareholder value when it agreed to the proposed buyout by: (1) allowing conflicted directors to lead the negotiations; (2) conducting only a limited market check and failing to properly consider strategic alternatives; (3) agreeing to preclusive deal protection measures; and (4) relying upon the flawed fairness opinion in assessing Answers’ options. Additionally, the shareholders sought additional disclosures from the board that they alleged were material to their decision to vote on the proposed transaction.
When a board decides to sell a company, it is obligated to procure the “best value reasonably attainable for its shareholders, and to direct its fiduciary duties to that end.” Since there is no “sale-process blueprint,” the court must assess whether the directors made “a reasonable decision, not a perfect decision,” on a case-by-case basis. The board bears the burden of proving reasonableness.
In holding that the board acted reasonably, the court determined that (1) the plaintiffs failed to show any form of favoritism or self-interest that would call into question the integrity of the process used by the board; (2) seeking offers from ten potential buyers prior to accepting the proposed transaction was sufficient; (3) the deal protection measures were not preclusive; and (4) given the unique characteristics of Answers, specifically its extreme reliance on Google, the limited financial analysis considered by the board was “sensibly crafted given the limited universe of information available.”
Next, the court held that the shareholders had not established a reasonable likelihood that they would succeed on their claims; therefore, the risk of delaying the vote on proposed transaction clearly outweighed any benefit that might result from granting an injunction.
The court further held that the shareholders failed to show that they would suffer irreparable harm if they were forced to vote on the proposed transaction, and declined to order the disclosures requested by the shareholders since they “represent[ed] a level of detail that might tend to confuse shareholders without contributing materially to their decision.”
Ultimately, since the shareholders had been “adequately” informed, the outcome of the transaction was “a matter for stockholder democracy and, thus, the Court should stand down and let the shareholders decide.”
In re Answers Corporation Shareholders Litigation, C.A. No. 6170-VCN (Del. Ch. April 13, 2011) (letter decision)
Two days after the Court of Chancery rejected Answers’ shareholders’ motion for a preliminary injunction to enjoin the vote on a proposed buyout transaction, the shareholders again requested that the court step in and delay the stockholders’ meeting in light of an alternative offer from an outside party.
The shareholders sought a 10-day delay (beyond the two-day continuance imposed by the board), claiming that the alternative offer materially changed the facts requiring consideration for the upcoming stockholder vote, such that they needed that time “to assess the import of the [alternative] offer and to see if that offer may have stirred the interest of other potential bidders.”
The court denied the shareholders’ request in a letter decision, stating “a period of three days has been viewed as inadequate to afford stockholders a fair opportunity to assess new or material disclosures.” Both the board and the court considered the terms of the alternative offer: the board rejected it and court did not believe that the offer was material to the stockholders’ decision making process. As support for its holding, the court reasoned that (1) there was substantial doubt that the financing necessary to carry out the offer could be procured; (2) the timing of the alternative offer was unclear; (3) the offer did not provide added benefits to preferred stockholders such that they would vote in favor of such a change; (4) there was concern regarding the market credibility of the offeror; and (5) the court questioned the offeror’s ability to consummate the proposed transaction.
The court held that a deficient offer was not material to the stockholders’ decision, and declined to order any further delay of the stockholder meeting.